Supply chain risk: what it is and how to manage it

Regardless of size and sector, supply chain risk is a reality for all companies today.

The shortage of raw materials and the continuous rise in their prices, to give just one example, are part of a familiar scenario.

However, alongside global factors, there are other circumstances that could cause a company to suffer a supply chain disruption.

Here are some examples:

• The failure of a trusted supplier.
• A logistical problem (e.g. the sudden closure of a warehouse).
• An error in completing customs paperwork (in the case of importing from abroad).

In this article we will understand together what is meant by supply risk, how it is managed by companies and what strategies should be adopted.

To analyse this phenomenon, we have used the April 2022 research report by the Rise Laboratory (Research & Innovation for Smart Enterprises) of the University of Brescia.

Supply chain risk: a definition

When we speak of supply risk, we are referring to the potential occurrence of a problem along a company’s supply chain, such that the provision of a good or service is prevented.

The event is usually sudden and unforeseen, and most often capable of bringing the production process to a halt.

Since 2020, there are almost countless production interruptions we have witnessed due to the lack of key components.

We need only think of the case of semiconductors: the impossibility of finding them has had a huge impact on entire supply chains, including the automotive and IT industries.

In addition to external variables, there are also internal factors affecting supply chain risk.

One of these is the lack of experience of the people in the company who – especially in smaller companies – do not know how to deal with risk.

However, adopting clear procedures is crucial. Let us see why.

Why it is important to manage supply chain risk

Developing efficient strategies to manage supply chain risk is important because the resulting impacts fall, with more or less force, on the entire company.

These are as follows:

• Consumption of time and financial resources to identify and activate relations with a new supplier.
• Loss of competitiveness due to potentially higher purchase prices, longer lead times to receive the good or less favourable payment terms.
• Loss of orders and customers with consequent reduction of revenue.

Let’s better understand with an example.

To assemble some of its products, the company uses customized steel screws. To obtain them, it relies on a supplier who has always guaranteed a convenient price.

A sudden halt in the supplier’s production due to a lack of steel puts the furniture company in difficulty, unable to ship its products.

Some customers decided to cancel their orders; at the same time, the management had to take action to find an alternative supplier capable of guaranteeing customised screws.

The search goes on for weeks, making it impossible to collect new orders for the blocked products.

The loss of existing customers is thus added to the loss of potential ones, with the added cost of higher costs because the price of the new screws will be higher than the price charged by the old supplier.

Passive and proactive supply chain risk management

The situation described is the result of passive supply chain risk management.

We are talking about a short-sighted attitude that does not anticipate problems and does not consider alternative ways of dealing with them.

While it is true that anticipating an interruption of supply relationships is very difficult, it is also true that there are solutions to reduce the damage.

In the case of the furniture company we have described, such an approach would have involved, for example, the creation of a list of backup suppliers.

This is a previously selected group of companies, created ad hoc to respond to possible problems. Some of these may have already been contacted beforehand, in order to get quotes for the required product.

Adopting such an approach is part of proactive supply risk management. What are its benefits?

• A reduction in uncertainty: having a list of alternatives allows assessments to be made at an early stage.
• Lower costs for searching for alternatives, in terms of money and time.
• Possibility of comparing different offers at the same time, moving towards the most advantageous one.
• Faster production restart once the choice has been made, thus limiting losses.

Having a plan B: the help of technology

A plan B such as the one we have described helps to reduce the undesirable consequences of an outage.

But how to implement it?

Digital technologies and their applications offer great help. By exploiting them, one can quickly obtain a list of alternative suppliers.

The solutions we have developed at Matchplat make this possible.

By combining AI algorithms and a database with more than 400 million companies, we enable every organisation to identify those with which it can reduce the risk of supply and its effects.

Analysing the market is the first step in identifying alternative suppliers with the right characteristics: AI makes this process more efficient by automatically reading the online contents of companies.

This makes it possible to profile them on the basis of products and services offered, certifications held, specific processes and much more.

What’s more, Matchplat’s AI also makes it possible to compare different countries, identifying those in which the production centres of a specific good are concentrated. In this way, it is possible to orient oneself towards the market with the most opportunities.

Conclusions

We have defined supply risk chain by investigating its possible causes.

Besides external factors (lack of raw materials, logistical problems or supplier failure), there are internal variables that can worsen it.

These certainly include the lack of preparation of company’s staff, who should adopt active risk management, defining a plan B to deal with unforeseen situations.

Creating a backup list of suppliers, which can be drawn on in times of need, is therefore the first step for the procurement department to manage a crisis.

Online searches require manually analysing hundreds of web pages. However, the search for a new supplier in the event of a crisis must be timely.

This is why having the right search tools at hand is the only alternative to stopping production and losing turnover and image.

The Explore platform we have developed in Matchplat allows you to identify only companies with specific characteristics, so that you can create a list of suppliers in line with your needs, in a short time and at affordable conditions.